Time-Space Harmonization of Consumer Price Indexes in Euro-Zone Countries

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Abstract

The objective of this paper is to discuss the possibilities of attaining a time-space harmonization of the consumer price indexes that are elaborated by the 12 European Union (EU) Euro-zone countries and by Eurostat. After focusing on the duality of the time and space domains for price indexes elaboration, the basic elements of the methodology of estimation of consumer price indexes are delineated, both in time and space. Then, the harmonization of formulae and baskets is outlined, with emphasis on the latter. The current system of surveys for price collection is reviewed and its limits are underlined, in order to suggest a methodology for a consumer basket harmonized approach which ensures better harmonized indexes comparability, reduction of list of products, and unification of quality adjustment methods. (JEL E31)

Introduction and Background

In the unified treatment that the authors intend to pursue in this paper, Consumer Price Indexes (CPI) are defined as synthetic price indicators elaborated to measure the relative price changes over time or over space of a basket of consumer goods and services purchased by households. CPI are used for a wide variety of purposes:

1) In time domain:

(a) for inflation measurement;

(b) for the indexation of commercial contracts, wages, social protection benefits, or financial instruments;

(c) as a guide for monetary policy;

(d) as a tool for deflating the national accounts aggregates or calculating changes in national consumption or standards of living.

2) In space domain:

(a) for comparing the price levels and the standards of living in different countries or geographical areas;

(b) for international or inter-area comparisons of Gross Domestic Product (GDP) and/or its components.

In time domain, CPI are elaborated nearly by all countries all over the world. Hereinafter, these will be denoted by Time Consumer Price Indexes (TCPI). Since 1997, besides the specific national TCPI, each Member State of the European Union (EU) has been calculating the Harmonized Indexes of Consumer Prices (HICP), according to rules specified in a series of European Regulations developed by the European Union Statistical Office (Eurostat) in agreement with the EU Member States [Eurostat, 2001a]. (1)

HICP are used to compare inflation rates across the EU, as well as to monitor performance as regards the convergence criterion of price stability in the Maastricht Treaty framework. Since January 1999, the European Central Bank (ECB) has also used them for the measurement of price stability across the Euro-zone [Eurostat, 2004]. Moreover, since the creation of the European Monetary Union (EMU) among 12 EU countries in March 1998, Eurostat calculates the Monetary Union Index of Consumer Prices (MUICP), an aggregate index covering the countries within the Euro-zone, (2) and the European Index of Consumer Prices (EICP) for the Euro-zone, plus the other EU countries. (3) The latter indexes are calculated using statistics provided by the Member States on consumer price changes and the consumption patterns of households within their economic territories. The aggregation across countries uses country weights from household final monetary consumption expenditure.

While HICP provide the best statistical base to make EU comparisons of inflation and represent considerable progress in the harmonization of methodologies, it is still hard to imagine a complete harmonization of TCPI. In this respect, technical agreement on different aspects is still to be proposed. Among them, the treatment of quality adjustments, the source of the weighting structure, the choice of formula (fixed base versus chained), the homogenization in price collection, and the methodological treatment of specific lots. It should be underlined that HICP cover all area of household final consumption monetary expenditure, but the relative importance of consumers' expenditure on each good or service varies from country to country. …